How is the Rental Income from Foreign Country taxes in US?

How is the Rental Income from Foreign Country taxes in US?

by | Mar 20, 2019 | IRS, tax filing, Tax Planning, Tax Preparation

How is the Rental Income from Foreign Country taxes in the US?

The possibility is quite high that you might decide to invest in a home or other property type while staying in the USA. The tax implications of such earnings vary from country to country. For instance, a foreign country taxes have a minimum threshold in place.

Only if your income exceeds the threshold, are you expected to pay taxes on the same, however, if you are staying in the USA and the property or house generates some income, you need to consider both the countries.

You will have to look after the tax ramifications in the country where you have bought the property as well as the USA.

Classification of Foreign Property

Before we get started with the tax implications, it is important to understand the different classifications of rental properties. It would help you identify which tax treatment category you belong to.

As a rule of thumb, you would need to report any income that you earn outside of the USA, be it rental, dividends, interests etc. The USA has different thresholds for rental properties, depending on the duration for which the property was rented. The following table will help you better understand the same.

Your usage Rented duration Applicable Taxes
Nil Anywhere between 0 to 365 days Regular rental taxes are applicable
More than 15 days Less than 15 days Not required to report on the tax return
Less than 10% of the number of days it was rented for or 15 days More than 15 days Taxes on rental property and a vacation home are applicable
More than 10% of the number of days it was rented for or 14 days More than 15 days Taxes on a vacation home and secondary residence are applicable

Reporting Your Income

The IRS expects you to file your rental income in a foreign country just as you would do for a property in the USA. Though there are a few exceptions.

  • You would first need to calculate the total income for a fiscal year due to the rental property(s).
  • You then have to convert the amount into USD.
  • The IRS’s website has a link to Foreign Currency and Currency Exchange Rates, you can refer to this page for exchange rates.
  • The rental expenses can include:
    • Any repair expenses
    • Foreign local taxes
    • A mortgage interest that you pay in a foreign country
    • Travel related expenses if you have to inspect your property
    • Any fees pertaining to the management of the property
  • One of the major differences is in the form of depreciable cost of the building portion that you own. It must take place over a period of 40 years.
  • In the event that you have to pay taxes on your foreign income in the native country, you can seek for offsets in your tax returns.
  • In your tax returns, you can mention the income and the tax deducted for the same which will help you avoid double taxation on the income.
  • Again, it largely depends on the understanding and double taxation agreement between the USA and the country where your property exists.
  • Apart from the above, you might have to file for FBAR, if you have set up a bank account in a foreign country to receive the payment for the rental property.
  • You might even have to file Form 8938 if the rental property is owned as a part of partnership, corporation or trust.

If you have any form of rental income from a foreign country, do not forget to report the same in your tax returns.

Haven’t filed taxes in the last 10 years? Start today

Haven’t filed taxes in the last 10 years? Start today

by | Mar 14, 2019 | tax filing, Tax Payers, Tax Planning, Tax Preparation, tax return

Haven’t filed taxes in the last 10 years? Start today

There can be a myriad of reasons why one hasn’t filed taxes. One could have forgotten to file their taxes, there was a death in the family which caused the delay, or you were seriously ill. Irrespective of what the reasons were, it is never too late.

In fact, every year about 7 million taxpayers fail to file their income taxes returns. Yet, there are more than 146 million Americans who do file their returns year on year. In other words, about 5% of the total population fails to file their returns.

If you haven’t filed your taxes, it is high time that you start doing the same immediately. The consequences of going for several years without paying taxes can be hazardous to your finances. It gives the IRS enough reasons to flex their muscles.

What if you haven’t filed taxes in the last 10 years? Well, there is a statement in the IRS policy. According to the statement, the IRS usually looks for tax records dating to six years in the past. However, if you haven’t paid taxes in about 10 years and want to start now, here are some tips to help you through.

  • Unfiled Years

You can either directly reach out to the IRS or take the help of a tax agent to find out the number of years for which you need to file taxes. The unfiled years is the first crucial step.

  • Old Refunds

This is one of the first steps where you start losing money. The IRS will only honour refunds dating back to three years from the current return filed date. If you had any returns prior to this period, the amount is lost.

  • Transcripts

While filing your taxes or even returns, it is important that the number matches with that of the IRS. You can take the help of transcripts from the IRS to trace your income history as accurately as possible.

The next logical step would be to file the taxes for the income mentioned in the transcripts. Any mismatch would allow IRS to dig deeper into your filing.

  • Penalties

In the event that you haven’t filed or paid taxes in quite some time, be ready to cough out hefty fines. Penalties such as failure to pay taxes and failure to file taxes can amount up to 47.5% of the total taxes that you are liable to pay.

Thus, if you haven’t filed your taxes yet, the sooner you start, the better it is.

  • Penalty Reduction

While back filing your taxes and returns, you have an option to ask the IRS not to charge you on the failure to pay or failure to file charges. If you qualify for the first-time abatement, use it for the first year.

Or else, you can use the reasonable cause argument and seek discounts or reduction of the pending taxes.

  • SFR

If you fail to file your returns within three years of the due date, the IRS might start a process called SFR or substitute for return. And should you file to return or replace the SFR, the IRS will look into it closely and compare with their SFR. And it is this close scrutiny which leads to a much longer turn around time. At times, it might even take more than 4 months.

  • Settlement

If you feel that you cannot pay the pending taxes, it is advisable to reach out to the IRS and strike a settlement with them. Depending on your needs, there are several types of settlements that you can choose from.

But it is important to settle if you cannot pay. The simple reason being, the second wave of enforcement and fines will follow.

Should you delay the filing process, you have more to lose than gain. With the help of the above tips, you can start your tax filing.

5 Tax Benefits you should claim if you use ENERGY SAVING EQUIPMENT

5 Tax Benefits you should claim if you use ENERGY SAVING EQUIPMENT

by | Mar 14, 2019 | tax filing, Tax Payers, Tax Planning, Tax Preparation, Taxation

5 Tax Benefits you should claim if you use ENERGY SAVING EQUIPMENT

U.S 5 Tax benefits for the second largest single consumer of energy in the world and about half of the total energy consumed in the U.S is used by the residential sectors which include apartments, independent houses, dormitories etc.

Under the Energy Star program since 1996, the U.S. Government provides tax credits to owners who install energy-saving equipment in their houses. This energy saving equipment help in energy conservation resulting in lowering the dependence of the country on foreign oil reduces national expenditure & also provides a healthy environment.

By using these tax credits, taxpayers can file for deductions in the annual tax returns which in turn reduces the federal taxes to be paid.

Equipment which qualifies for Energy Tax credits are:-

Central air conditioning

Energy Star qualified geothermal heat pumps.

Solar panels or solar water heaters.

Biomass stoves.

Non-solar water heaters operating on gas, propane or electricity.

Small Wind turbines.

HVAC Air Circulating Fan.

Electric Heat Pump water heater.

Gas Furnaces.

The major 5 tax benefits you can claim if you are using Energy saving equipment are given below:-

1(A)For Central Air Conditioning systems

  1. A tax credit of $300 is given for split systems with SEER >= 16 and EER>=13.
  2. For Packaged air conditioning products, the qualifying efficiency levels are SEER >=14 and EER>=12.

(B) For HVAC Air CirculatingFans – a Tax credit of $50 is applicable for the fans that use less than 2% of the furnace’s energy.

2(A) For Energy Star qualified geothermal heat pumps

1.A tax credit of 30% of the cost of the product is available for geothermal heat pumps.

2.These geothermal heat pumps use the natural heat from the ground to provide heating &cooling effects and especially hot water.

3.All the Energy Star qualified geothermal heat pumps are eligible for tax credits.

(B) For Solar Panels or Solar Water Heaters

  1. Deduction of up to 10% of the cost i.e. up to $500 is applicable on Solar Water Heaters
  2. These panels absorb the energy from the sun and convert it to electricity whereas the solar water heaters also use solar energy to heat up water.

For Electric Heat Pump Water Heaters: – A tax credit of $300 is available for water heaters with Energy Factor>=2.

3(A) Biomass Stoves

1.A tax credit of $300 is available on biomass stoves.

2.These stoves burn the fuels derived from plants and are used for water heating purpose basically.

(B) Non-Solar water heaters

A tax credit of $300 is available for non-solar water heaters.

These water heaters operate on gas, propane or electricity and should have an energy factor of at least2 to be eligible for tax credit.

4(A) Roofs

1.Energy efficient roofs are eligible for a tax credit of up to 10% of the cost i.e. $500.

2.Energy Star certified roofs are eligible for these tax credits.

(B) Windows, Doors & Skylights

1.Energy efficient windows, doors and skylights, when used in homes, can maintain the cooling effect of the house during summers & will prevent heat loss during winters.

2.They are eligible for a cumulative tax credit of $500 i.e. a tax credit of up to 10% on the cost.

5(A) Insulation

1.Tax credits of up to 10% on the cost of the products used for insulation.

2.Those products which reduce air leaks can be used for insulation.

3.There are various insulation products like batts, spray foam insulations etc. which can be used as energy efficient insulating appliances.

However, all these tax credits can be availed if a copy of the manufacturer’s certification statement is present with the tax-payers and also the equipment satisfies the specifications & qualifying criteria.

5 Things that a COUPLE be mindful of when FILING TAXES

5 Things that a COUPLE be mindful of when FILING TAXES

by | Mar 13, 2019 | Deduction & Credits, Tax credits, Tax exemption, tax filing, Tax Planning, Tax Preparation

5 Things that a COUPLE be mindful of when FILING TAXES?

The decision to marry someone usually revolves around love and compatibility. Finance is an aspect that we don’t know usually bring into the equation. However, Filing Taxes is an aspect that ought to get additional attention, since it comes with tax implications.

You can be a smart couple and save thousands of dollars in a financial year by taking a few key decisions related to taxes. Here are the top 5 things that you need to be mindful of when filing taxes.

Filing Status

Of the many decisions that a new couple has must take, the first one comes down to choosing between the following filing types:

  • Married filing jointly
  • Married filing separately

Needless to say, each type has its pros and cons. Let’s assess the benefits of filing jointly first.

  • On filing together, couples can enjoy lower tax rates since their income is combined and then the taxes are calculated.
  • It brings in a sense of responsibility as well since both the individuals must sign the filing.
  • You get access to a wider range of benefits as per the tax codes.

However, there are a few scenarios and conditions where you would want to file separately. Such as:

  • If a spouse is involved with business and the other partner does not want to be involved with the same.
  • In the event that a spouse is expecting refunds, filing separately will not jeopardize the refunds as well.

Possibly Lower Taxes

As already mentioned in the above, couples filing jointly can benefit from lower tax rates due to the combination of income. Couples with varying income levels can benefit from it. However, the benefits just do not end with lower taxes. You can opt for several tax credits as well. Here is a couple of them.

  • Lifetime learning credit
  • Adoption expense credit

If one spouse itemizes their tax filing, the tax code considers the standard deduction of the other spouse as $0. This ensures that the couple together itemizes and does not miss out on deductions.

Gift Taxes Exemption

Another advantage of filing for taxes jointly comes in the form of gift taxes exclusion or exemption. Here is how it works.

  • Currently, the annual federal exclusion for gift taxes is $14,000 per spouse.
  • If you are filing jointly, you can combine this exclusion.
  • You can use this clause to strategically move assets to loved ones or between both of you.

Cap LessMarital Deduction

This is one of the most understated benefits of filing taxes together as a couple. Though none of the couple’s plans for this, it is good to have feature. Surviving spouses have access to the unlimited marital deduction which allows them to transfer assets to their name. This might not seem that significant early on but gains a lot of momentum as the year’s pass.

Tax Credit

The child tax credit is one of the most alluring credit systems for married couples who want to file jointly. Here are the benefits.

  • The IRS allows couples to reduce their net taxable income by $1,000 for every qualifying child.
  • Factors such as relationship, age, dependent status, residence, citizenship and support decide whether your child is qualifying or not.
  • You can claim the benefits if your child is less than 17 years old, lives with you for more than half of the year and is related to you either by blood, adoption or marriage.

Given the fact that in 2015, 141.2 million taxpayers declared earnings to the tune of $10.14 trillion as adjusted gross income, resulting in taxes worth $1.45 trillion, it is essential that you are aware of the above.

Help the NRI in the US for global income tax filing

Help the NRI in the US for global income tax filing

by | Mar 12, 2019 | global income tax, NRI, tax filing, Tax Planning, Tax Preparation, taxes

Help the NRI in the US for global income tax filing

The deadline for filing your taxes is approaching fast. For the current assessment year, the deadline is the 15th of April.The deadline of filing your taxes for 2018. The entire income tax filing and return process can be a bit overwhelming for some.

However, if you are aware of the different steps and take a more structured approach, it won’t seem as daunting as it does now. Here are some simple steps and tips to help you get through the tax season.

Global Income

Irrespective of whether you are a US resident or citizen (includes NRI, OCI or PIO), you are liable to pay taxes on your global income.

Salary

US Citizens who earn a part of their income in India are liable to pay the taxes in the USA. If you earn a salary in both the countries, you will have to pay taxes for the country where your current residence is at.

However, if you had earned your salary before moving to the USA and have paid the liable taxes, you can take tax credits and adjust the taxes with your US income. You can use the Form 1040 to declare your salary and Form 1116 for any tax credits.

Freelancing or contracts

For consultants who are working in the USA and earn money in India from their respective company, must pay taxes as well. It doesn’t matter if you have a bank account in India or the USA, you are liable to pay taxes. Such income must be reported in Schedule C of Form 1040.

Rent

For NRIs who have rental properties back home, the income generated from it will be taxed in the USA. But the question arises should you pay taxes in India as well? This is where the DTAA or the Double Taxation Avoidance Agreement comes into the picture. As per the agreement, you will have to pay taxes in India for the income generated in India by renting your house.

You must report the income from renting properties in your Form 1040 and claim for tax credits. The Schedule E of Form 1040 is where this declaration would go. For availing tax credit, you will have to fill up the Form 1116.

Capital gains

The capital gains are applicable to various assets such as shares, mutual funds, lands, selling of properties etc. Any gains that you make on these assets are under the purview of capital gain taxation. It usually is split into short-term capital gains and long-term capital gains.

When it comes to land, property or any other physical assets, if you hold them for three years and then decide to sell, long-term capital gains would be applicable. Should you decide to sell these assets within 3 years of buying them you will have to pay short-term capital gains.

For mutual funds and shares, the holding duration is lower at 1 year. If you plan to sell shares or redeem any mutual fund units post the completion of a year, you will have to pay long term capital gains on them, if the gains exceed INR 1 lac. For instruments sold before that, short-term capital is applicable.

All these incomes should be declared in Schedule D of your Form 1040. And if you have paid any taxes, you can claim for tax credits by filling up Form 1116.

These are some of the major income sources and their implications on your tax filing and returns. Being aware of them will ensure that you can make the most of tax returns.

What is the difference between a Standard Deduction and an Itemized Deduction

What is the difference between a Standard Deduction and an Itemized Deduction

by | Mar 7, 2019 | Standard Deduction, tax deductions, tax filing, Tax Planning, Tax Preparation

What is the difference between a Standard Deduction and an Itemized Deduction? 

While filing your federal taxes, there are several aspects that you need to be cognizant about. Of those many, two terms that will crop up the most are a standard deduction and itemized deduction. Quite a few taxpayers get confused when it comes to these two deductions. So, here are the differences.

Standard Deduction

As the name suggests, it is a fixed dollar value. This reduces the net amount that your tax calculations are based on. The following are the standard deductions for the current year.

  • For taxpayers who are single or are married and filing separately, the deduction stands at $12,000.
  • For taxpayers who are married filing jointly or are qualifying widow(er), the deduction stands at $24,000.
  • For taxpayers who are the head of the household, the deduction stands at $18,000.

The standard deduction limit increases by a considerable margin if you are either visually impaired or above the age of 65 years old. For taxpayers who are either single or the head of the household, the amount increases by $1,550 and it increases by $1,250 if the taxpayer is a qualifying widow(er) or is married.

The numbers suggest that two out of every three tax filings, claim the standard deduction. Here are some other benefits of standard deductions.

  • Standard deductions do not require any sort of records or receipts for various expenses, in the event that you are audited by the IRS.
  • A standard deduction ensures that you can opt for a deduction even if you have no expenses that can qualify for itemized deductions.
  • Standard deduction eliminates the need to itemize expenses such as charity or medical expenses.

Itemized Deduction

As one would come to expect, Itemized deduction also helps you knock off some dollars from your taxable income. For example, if you were in the 22% tax bracket, every $1000 that you list in the itemized deduction would reduce your tax liability by $220.

Itemized deductions on the Schedule A of your Form 1040 would let you benefit from the following.

  • If you had expenses out of your pocket when it comes to dental or medical expenses.
  • If your itemized deductions sum up to be more than what your standard deductions account for.
  • If you made donations to charities that are in the qualified list.
  • If as an employee, you had a large expense that has not been reimbursed.
  • If you had large miscellaneous expenses that have not been reimbursed.
  • If you had a large casualty that is not covered as insurance such as fire, wind, theft etc.
  • If you paid any mortgage interest or real estate taxes, you can claim them as well.

There is a certain limitation when it comes to itemized deductions. If your AGI or adjusted gross income is more than any of the following, the limitations kick in.

  • For a single taxpayer, the limit is $261,500.
  • For taxpayers who are the head of the household, the limit is $287,650.
  • For taxpayers who are married but filing separately, the limit is $156,900.
  • For taxpayers who are married filing jointly or qualifying widow(er), the limit is $313,800.

There are several instances, where opting for itemized deduction is more beneficial. With itemized deductions, you can claim for a larger tax benefit than what you would have done otherwise with standard deductions. As many as 103,301,532 taxpayers opted for Standard Deductions in the previous tax filing year versus 45,610,227 taxpayers who filed for Itemized Deductions. Thus, you can choose either depending on your expenses.